Introduction:
As we stand on the brink of 2024, the next few months will prove pivotal for market participants preparing for the shifts introduced by EMIR REFIT (European Market Infrastructure Regulation Regulatory Fitness and Performance Programme) in derivatives transactions reporting.
The urgency stems from the looming deadline of April 2024, underscoring the need for proactive measures.
Background:
Since February 12, 2014, derivatives traded on the European market, both on exchanges and over-the-counter, have been subject to transaction reporting obligations under EMIR.
Over the years, these reporting obligations have evolved and intensified, responding to changes in regulatory technical standards, implementing technical standards, validation rules, and Q&A on EMIR implementation.
EMIR REFIT Changes:
The EMIR REFIT, adopted by the European Commission on October 7, 2022, introduces new regulatory standards, which will be applicable from April 29, 2024, following an 18-month transition period. The revamped reporting requirements increase the number of data fields from 129 to 203, reflecting international guidelines on critical data elements.
Technical Challenges:
While aligned with the overarching goal of ensuring safer and more transparent derivatives trading, EMIR REFIT complicates reporting to central repositories.
Notably, 77 new data fields have been added, 67 modified, and only 3 removed, affecting counterparty data and management. Guarantees are now categorized by type, direction, and evaluation, necessitating adjustments to system interfaces and databases.
Complex Reporting Logic:
EMIR REFIT refines the "Action Type" field and introduces the "Event Type," enhancing authorities' visibility into existing transactions. However, this adds complexity to reporting logic, with nine action categories and twelve event categories providing a detailed portrayal of a derivative's lifecycle.
Declaration Format:
To standardize reporting, EMIR REFIT mandates the use of the ISO 20022 XML format (see our article on this topic) for data transmission to central repositories. While this aims to enhance data quality, implementation poses challenges for entities currently using CSV or other formats.
Challenges and Procedures:
The regulation allows smaller non-financial counterparties (NFCs) facing financial counterparties (FCs) to delegate reporting obligations to the latter. For FCs, this unilateral reporting option enhances data control, ensuring quality and compliance. However, existing reporting systems at FCs must be strengthened to accommodate individual declarations for each transaction part when reporting is delegated.
Data Quality Enhancement:
Addressing the lack of reconciliation guidelines, EMIR REFIT aims to improve the "Paring rate" through mandatory reconciliation of declared transactions among FCs, FC central repositories, and counterparties' central repositories.
New Reporting Elements:
EMIR REFIT introduces reporting for derivatives with crypto assets as reference values under
the "Commodities" category, distinct from traditional FX classifications for Bitcoin and Ethereum.
Unique Product Identifiers (UPIs):
All derivatives must have standardized UPIs, managed by the ANNA DSB, necessitating system adjustments and increased market effort.
Counterparty Rebalancing:
Transactions related to portfolio compression or counterparty rebalancing must now be assigned a unique PTRR ID for traceability, provided by the relevant PTRR service provider.
Global Impact and Future Implications:
Swiss financial institutions, despite being outside the EU, may be affected due to subsidiary connections. There is potential legislative revision in Switzerland to align with EMIR REFIT, ensuring market access and attractiveness.
Conclusion:
As the clock ticks towards the April 2024 deadline, navigating the intricacies of EMIR REFIT requires a strategic approach, emphasizing the importance of adapting systems, enhancing data quality, and preparing for the upcoming regulatory landscape in derivatives trading.
In summary, the time to act is now. Navigating the complexities of EMIR REFIT demands a forward-thinking strategy, with the looming deadline serving as a stark reminder of the need for swift and comprehensive action.
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